SIF Folio: Is car dealer Lookers a true contrarian buy?

Tuesday, Mar 19 2019 by
18
SIF Folio Is car dealer Lookers a true contrarian buy

I think it’s fair to say that many of us feared the worst when Staffline shares were suspended at the end of January. So it’s a welcome relief to be able to report positive news this week for this SIF folio stock.

I’m also pleased to have a new stock to consider for the portfolio. Car dealership group Lookers is undoubtedly a contrarian choice at the moment, but I’ll be looking at the numbers and deciding whether to add the stock to the SIF folio.

Staffline: What really happened?

After shares in blue collar recruitment group Staffline (LON:STAF) were suspended following allegations “in respect of invoicing and payroll practices”, I took another look at the firm’s historic cash flow. I didn’t find anything resembling a smoking gun, but I was still concerned about the situation.

After an independent legal investigation, one problem has been confirmed. The company is working with HMRC “to quantify underpayments made in the past to workers, over a number of years prior to 2018”.

It seems the company may have breached minimum wage regulations by not paying staff in certain food production facilities for time spent donning protective workwear before their shifts. An existing provision for this problem has been increased by £3.5m as a result of this investigation.

My view: This news isn’t as bad as it might have been. I’m still a little unhappy to see exceptional charges of £23.5m this year, but on balance I share Graham Neary’s view that the shares should be worth north of 1,000p.

Lookers: Crazy or Contrarian?

I exited the automotive sector in January when I sold the SIF folio’s holding in used car supermarket Motorpoint.

But I’m now mulling a return. Car dealership group Lookers (LON:LOOK) has cropped up in my screening results this week.

This company’s history can be traced back to 1908, when it was founded as a bicycle retailer. Lookers started selling cars in 1910 and made its first acquisition in in 1960. Since then it’s grown steadily and now operates 154 franchised dealerships.

Last week’s 2018 results suggested that the company coped well with last year’s WLTP-induced new car supply restrictions:

  • Revenue +4% to £4,880m

  • Gross profit +2.3% to £515.5m

  • Pre-tax profit -9% to £53.1m

  • Net debt -11% to £86.9m (equivalent…

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Lookers plc operates as a motor retail and aftersales company in the United Kingdom. The Company operates through two business segments: motor distribution and parts distribution. The motor division consists of over 150 franchised dealerships representing over 30 marques from approximately 100 locations. Aftersales represents the servicing, repair and sale of franchised parts to customers' vehicles. Its parts division operates in the independent aftermarket sector of the United Kingdom's motor retail market, where it operates through three operating companies: FPS, Apec Braking and BTN Turbo. FPS is a warehouse distributor of automotive parts. Apec Braking is a provider of dry braking (pads and discs). BTN Turbo is a distributor of turbochargers and supplier of related value added services. Its operations are also carried out across Ireland. It sells approximately 180,000 new and used cars and vans per year. In addition, it has an independent parts distribution business. more »

LSE Price
45.05p
Change
-1.0%
Mkt Cap (£m)
177.1
P/E (fwd)
4.9
Yield (fwd)
8.6



  Is LON:LOOK fundamentally strong or weak? Find out More »


5 Comments on this Article show/hide all

stuartb58 19th Mar 1 of 5
2

Thanks for a very comprehensive review and good luck with it. I have held Lookers for nearly ten years, so timing was very lucky on original purchase and I have not felt the need to sell. Met management at AGM a few years ago and Andy Bruce was most impressive (he became CEO a year or two later). Cash generation is key for any investments I make and Lookers is very strong in this regard - net cash inflow from operating activities almost £55M last year against market cap £385M. Bit disappointed they are not going to buy back any more shares for the time being. Yield is a fraction over 4% at 100p and looks safe to me. Uncertainties around the sector may limit any short term progress, so perhaps of no interest to day traders.

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rbf 19th Mar 2 of 5
1

Thank you for this review. Whilst i remain positive on the sector mainly due to the very low valuations, I did sell Lookers some months ago but retain sizable holdings Marshall Motors and Cambria Autos which I feel offer even better value and stronger growth prospects. I would be interested to know why you prefer Lookers?

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Roland Head 19th Mar 3 of 5
1

In reply to post #459628

Hi rbf,

Thanks for your comment. My stock selections are guided by the results of my screen.

https://www.stockopedia.com/screens/stock-in-focus-screen-113218/

The rules of the SIF folio state that I can only by stocks which pass all of my screening tests. So that's why I chose Lookers (LON:LOOK) - Marshall Motors and Cambria Autos don't currently qualify, although I agree that both seem quite attractive at the moment.

Cheers,

Roland

Disclosure: I own shares in LOOK

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acerskine 20th Mar 4 of 5

Hi Roland thanks for a detailed review as usual and for bringing this to my attention. It looks like a solid business. I am going to join you on this one!

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in (profitable) commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »

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